What’s wrong with Lloyds Banking Group plc?

Over the past three years, shares in Lloyds (LSE: LLOY) have gone nowhere. Excluding dividends, the shares have lost 18.7%. This performance would be acceptable were it not for the fact that over this period pre-tax profits have surged from £415m (year-end 2013) to an estimated £7.1bn for 2017. At the same time, the bank’s per-share dividend payout has risen from zero to 3.6p per share, for an estimated dividend yield of 5.8%.

These figures certainly don’t imply that shares in Lloyds should be worth less today than they were three years ago. So what’s happened and why has the…

Keep Reading

Register by giving us your email below to continue reading all of the content on the site. Soon you will also begin to receive our FREE email newsletter, The Motley Fool Collective. It features straightforward advice on what’s really happening with the stock market, direct to your inbox. It’s designed to help you protect and grow your portfolio. (You may unsubscribe any time.)

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.

Over the past three years, shares in Lloyds(LSE: LLOY) have gone nowhere. Excluding dividends, the shares have lost 18.7%. This performance would be acceptable were it not for the fact that over this period pre-tax profits have surged from £415m (year-end 2013) to an estimated £7.1bn for 2017. At the same time, the bank’s per-share dividend payout has risen from zero to 3.6p per share, for an estimated dividend yield of 5.8%.

These figures certainly don’t imply that shares in Lloyds should be worth less today than they were three years ago. So what’s happened and why has the market marked down the shares despite rapid earnings growth?

What’s behind the stagnation?

It seems there could be several reasons why shares in Lloyds have struggled to move higher during the past few years.

The first and most quoted reason is the presence of the UK government in the market. When Lloyds was bailed out by the taxpayer at the height of the financial crisis the government pumped £20.3bn into the bank in return for a 43% stake. Over the past few years this stake has been gradually sold off, and earlier this month the government reported its holding has fallen below 2%. Such a large seller in the market is bound to depress the share price for any company, Lloyds is no exception. Even though shares in the bank are one of the most popular investments in the UK, consistent retail investor buying has not been enough to offset government selling. Still, the government should be out of the bank entirely within the next month or so, which will mean this headwind will evaporate.

As well as the removal of the government selling headwind, there’s light at the end of the tunnel for PPI claims and other fines for past mistakes which have weighed on earnings. Over the next few years, these costs should all but evaporate.

The only way is up?

Broadly speaking this means that over the next year or so, the headwinds that have held Lloyds back during the past few years will vanish and shareholders should reap the rewards.

Not only will the final sale of the government stake remove a large seller, but it will also remove political pressure from the bank, leaving it free to act as a private company without the fear of government intervention. Management can increase payouts to investors, cut costs without being reprimanded by politicians and use excess cash to reinvest back in the business. With PPI fines also coming to an end, the company should find itself with plenty of excess cash going forward, and the market may begin to forget the stigma that has been attached to banks since the financial crisis.

The bottom line

Overall, even though shares in Lloyds have gone nowhere for the past three years, as the government finishes its sell-off, and profits continue to recover, it’s unlikely shares in Lloyds will continue to languish for much longer.

Small-cap bargain?

If you've run out of patience with Lloyds, our analysts believe that this company could produce returns of up to 50% in the near term.

In fact, we're so excited about the company's prospects we've labelled it one of the market's“top small-caps”.And all you have to do to find out more about this opportunity is download this no-obligation, free report today.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.